In mid-November, presidents of Guatemala, El Salvador and Honduras presented the ‘Plan of the Alliance for Prosperity in the Northern Triangle’ in Washington DC. The plan consists of medium-term working guidelines and commitments by regional leaders to promote human well-being in the region, improve the work and business climate, ensure more effective government, create jobs, reduce poverty, improve the quality of services and expand economic opportunities for all of those in search of a better life. The plan identifies, among other issues, the hindrance in attracting regional investment due to high energy costs and limited connectivity, with high energy costs due to reliance on fossil fuels (item 1.5). The plan also notes the lack of fiscal space to fund initiatives including infrastructure improvements, and despite tax reforms, fiscal revenues have remained between 10 and 14% of GDP, below the average in Latin America.
Given stretched public sector finances and increasing deficits, combined with competing priorities and relatively short governmental terms (as well as an upcoming election in 2015 in Guatemala), strategic planning surrounding improving infrastructure forms an essential base for sustained development. Whilst public sector institutions have been established, these remain constrained by propensity to issue debt (placing further pressure on public sector budgets) and a lack of transparency.
So, why do roads matter in Central America?
According to 2012 World Bank studies, highway transportation costs in Central America represent 30% to 35% of total logistics costs. A model for Central America developed by the World Bank in 2012 assesses the econometric relationship between volume of freight carried and the distances between production hubs and consumption centres – this model estimated that a 1% increase in highway transportation costs and times can reduce Central American exports by 1.65%.
According to Latinvex, El Salvador tops the table for Central American infrastructure, and ranks 5th out of 19 LATAM countries. El Salvador ranks fourth best in terms of roads, and importantly, the third best time for exports and fourth best import and export costs in Latin America. Interestingly, among Central American countries, El Salvador is the principal user of road transportation for foreign trade, both in volume and as a percentage of total foreign trade (52% of imports and 56% of exports in volume, and 27% and 44%, respectively, in value).
What government institutions are in the mix?
In El Salvador – the Fondo de Conservación Vial [Road Maintenance Fund] (FOVIAL) is autonomous, and was created to perform regular and routine maintenance of the national road system using revenue from a gasoline and diesel fuel charge of US$0.20/gallon, applicable to all motorized vehicles. In 2012, Legislative Assembly progressed reforms, adding ~USD26 million to the nearly US$70 million FOVIAL received annually prior to 2012, and enabled FOVIAL to leverage its investments by issuing securities.
In Honduras, the ‘Fondo de Viales’ maintains 14,648 km of roads, 77% of which is unpaved – execution of improvements as planned has been slow due to delayed deployment of funds (both domestic budget funds and external funds), strikes by workers and slow approvals required by local Congress. The 2014 ‘General Management of Public Investments’ (Direccion General de Inversiones Publicas) notes the Fondo de Viales’ inability to meet liquidity requirements per public sector requirements (Instituciones del Sector Público), and designed a credit instrument applicable to taxes and charges by contractors, with the same duration of the contract. Under this mechanism, the Fondo issued HNL21.2m (USD1m) to construction group Constructora William y Molina.
In Guatemala, the ‘Fondo Vial’, created in 1994, is funded by a surcharge of 1 quetzal per gallon of gasoline purchased by drivers, facilitating funding of private firms to be contracted for maintenance work. In 1997 the Fund was rebadged Covial (Fondo de Conservacion Vial – Road Maintenance Fund) – when initially created, it covered 706 km of paved roads and 612 km unpaved, and now covers 14,000 km paved roads, and another 9,000 km unpaved. Despite being established to fund necessary works, the Fund has run into significant issues surrounding non payment of contractors, resulting in up to 70% of works being delayed. Whilst Covial currently raises approximately GTQ755m (USD99m) from the gasoline surcharge, Edgar Deger, President of the Guatemalan Association for Construction Contractors, suggest a budget closer to GTQ1bn would be more suitable, noting that ‘within the same Government there is no precise data on what Covial collects and receives’. According to recent press articles, the Government has audited outstanding debt from prior years which totals Q3.3bn (USD435m) for emergency works – presently, Covial owes Q400m (USD52m) to some 600 firms contracted for supervision, cleaning and maintenance.
And in conclusion…
The importance of roads in the wider economy plays a pivotal role in trade and development. Given infrastructure budgets that remain poorly managed and solutions to cover spending resulting in further debt issuance (versus coming from public reserves), public budgets continue to remain stretched and will deteriorate further given the propensity of governments to resort to debt based solutions. In addition, poor tax collection and allocation of funds raised to public projects remains compromised. Furthermore, with limited transparency, surety over spending combined with suitable audits and data collection continues to undermine efforts to improve and develop roads in the region.
Whilst an inability of the public sector in the region to manage funding and execution of strategies compromises the quality of roads in the region, this also offers an opportunity for the emergence of PPPs and further development bank funding. Ensuring suitable incentives and obligations are in place are crucial in creating a holistic solution to the gap in regional infrastructure.